W-2 / ira

[mrbill]

Client was a w-2 employee until march, 2014. Continued to work for an affiliate for balance of 2014. Received a w-4 for 2015 showing $1k in wages and 401k contribution of $61, along with the retirement box being x'd. Client wants to make a $6,500 ira contribution and the $61 401k contribution along with the x in the retirement box disallows. If i delete the x and $61 from the w-2, it allows the ira contribution. However, would i be at risk ? Also, company claims they cannot issue a corrected w-2. Do i have any options ? Seems like a $61 dollar deduction preventing a $6,500 irs contribution is heavy. Thanks, bill...

[New York Enrolled Agent]

. However, would i be at risk ? l...

Have you ever read IRC §6694?

[Burke]

What is his MAGI? IRA traditional phase-outs for Single with participation come into play at $60K - $70K so should not affect his IRA contribution unless MAGI is over that.

Sorry, but that "X" and the $61 contribution means he participated in an employer plan last year, so it is subject to the IRA limitations based on his filing status and income. Altering the W-2 would not be legal, and besides, it has already been reported to the IRS so their records show it and the IRA would be disallowed or limited if his MAGI is over the limit.

[mrbill]

Thanks Burke & NYEA. I knew there was a risk in changing, so it will not be done. His MAGI is way over the limit.

[Roland Slugg]

I have had several clients over the years who quit a job, or retired, in December and did not work for that employer a single day in the following year but did get a final paycheck early in January and, a year later, received a W-2 reporting the wages paid on that one check. It troubles me that the receipt of that one paycheck might render the recipient ineligible to make a deductible IRA contribution ... and I don't think it does.

Code §219(g) says: "If (for any part of any plan year ending with or within a taxable year) an individual or the individual's spouse is an active participant" in an employer plan. Notice the use of the word "is." Code §219(g)(5) then goes on to define "active participant," but it's quite difficult to understand.

In my opinion a person ceases to be an "active participant" in his employer's plan the day after he leaves the employ of that employer, and the receipt of a single paycheck early in the following year does not extend that participation. Your client was an active participant when he earned that $1,000, but he was not an active participant when he received it.

mrbill, I understood what you meant when you wrote that if you change the "Ret Plan" box and not show it as checked when entering it in your tax prep software, that the program allows a higher IRA deduction. If you believe what is written above, and counsel your client accordingly, you might want to do just that. I have done it for a few of my clients, with no repercussions. I may have written an explanation and attached it the the affected returns ... don't remember.

[New York Enrolled Agent]

Roland - IMO you are in dangerous territory when you change the check-off in the retirement box.

We don't know all the facts but I think (depending on the facts & circumstances) there are situations where an individual may be deemed an active participant even if they were not employed in the tax year. For example, see Reg. §1.219-2(c).

Regulation §1.291-2 and Notice 87-16 discuss active participation.

[Roland Slugg]

NYEA, I don't think Regs §1.219-2(c) is relevant, but it appears that Regs §1.219-2(e) is, especially when read together with Regs §1.219-2(d)(1).

However, what do you make of Regs §1.219-2(d)(2)? Does that paragraph mean that the $61 contribution is considered to be one for the prior year ... 2014 in this case ... thus rendering the T/P NOT an active participant in 2015?

I was not suggesting that the tax preparer "change" the "Ret Plan" box ... he couldn't do that anyway ... but to simply ignore it.

[New York Enrolled Agent]

I may have misread but it sounded like that was what you were suggesting.

mrbill, I understood what you meant when you wrote that if you change the "Ret Plan" box and not show it as checked when entering it in your tax prep software, that the program allows a higher IRA deduction. If you believe what is written above, and counsel your client accordingly, you might want to do just that. I have done it for a few of my clients, with no repercussions

In any case, if you think it is wrong and want to ignore it for purposes of a deductible IRA then I would strongly urge the use of Form 8275.

[Nashville]

Software should not allow it

Problem is, if you DO check the box 13B as covered by pension plan, tax software SHOULD NOT ALLOW deductibility of an IRA given MAGI is sufficiently large.

Roland has introduced an extremely remote set of circumstances, but I have seen it happen. A W-2 issued for prior year earnings (even after death)can lead to all manner of misery - in my experience the worst was to destroy a citizen's foreign income exclusion for the whole year. I believe the proper treatment would be for the employer to not check the box if at no point during the year was the employee covered - especially proper if the paydate itself is the result of a prior year pay period. I also do not believe there would be any success at getting the employer to change the W-2, so that would be a waste of time.

I like the idea of entering the W-2 without the box, but covering the preparer with an 8975. I've heard it expressed that the 8975 is a "please audit me" invitation, but I have not found this to be the case. However, one possible result is that IRS through neglect of its own code sections may disallow the deductibility of the IRA. Could lead to a series of grisly letters and an appeal. If there is a better alternative to the 8975 I would like to hear it.